I remember a study on general aviation plane crashes. They found that very few plane crashes came about because the pilot made a single, obvious mistake. Instead, the common pattern was a series of missteps, each so small that you couldn't properly call it a "mistake" in and of itself, the pilot was just cutting corners on the recommended safety margin. And then something happened that was out of the pilot's control, like bad weather or distraction or mechanical failure. Because the safety precautions that make it normally possible to recover from these events weren't followed, this resulted in a crash instead of merely a nerve-wracking landing.
I think the same thing happens with finance. If you look at the proximate cause of bankruptcy, it's almost always that somebody has a health emergency or a death in the family or loses their job. But many people have health emergencies, deaths in the family, and stints of unemployment without going into bankruptcy. And the reason why is the same thing Benjamin Graham and Warren Buffett have been espousing in investing for years: Margin of Safety.
If you always live on the edge, then it's a given that sometime you're going to fall off. Hold back 6-12 months reserve of salary, and suddenly unemployment doesn't look so scary. Health insurance makes a sudden medical emergency not quite so scary. Have $10-20K in the bank, and you don't need to worry that totaling your car is going to send you into crippling debt.
The irresponsible part is not that these people got sick or lost their job, it's that they didn't prepare for contingencies where they would get sick and lose their job. There's this culture in America where as soon as you start earning more money, you have to spend it on something, otherwise you're wasting it. But there's a tension between resiliency and efficiency, and if you're always being perfectly efficient, things tend to go very wrong when they go wrong. Make your bargains accordingly.
I think the same thing happens with finance. If you look at the proximate cause of bankruptcy, it's almost always that somebody has a health emergency or a death in the family or loses their job. But many people have health emergencies, deaths in the family, and stints of unemployment without going into bankruptcy. And the reason why is the same thing Benjamin Graham and Warren Buffett have been espousing in investing for years: Margin of Safety.
If you always live on the edge, then it's a given that sometime you're going to fall off. Hold back 6-12 months reserve of salary, and suddenly unemployment doesn't look so scary. Health insurance makes a sudden medical emergency not quite so scary. Have $10-20K in the bank, and you don't need to worry that totaling your car is going to send you into crippling debt.
The irresponsible part is not that these people got sick or lost their job, it's that they didn't prepare for contingencies where they would get sick and lose their job. There's this culture in America where as soon as you start earning more money, you have to spend it on something, otherwise you're wasting it. But there's a tension between resiliency and efficiency, and if you're always being perfectly efficient, things tend to go very wrong when they go wrong. Make your bargains accordingly.